Op-ed: The triumph and hope of the American economic experience

Four years ago, the housing market
collapsed, the financial system imploded, and the country plunged
into a recession the likes of which had not been seen since the
1930s. The magnitude of the decline, and the speed with which it
occurred, was terrifying. Jobs were lost by the hundreds of
thousands, households found themselves buried under mountains of
debt, and the stock market went into free fall. On Wall Street and in
little towns across America, banks and insurance companies were
failing, while over in Detroit, the auto industry teetered on the
brink of bankruptcy. Capitalism itself, the quintessential American
economic system, lay imperiled.

The rest of the world was hardly
immune. The developed countries of Western Europe—Greece, Ireland,
Iceland—endured withering crises. The International Monetary Fund
was summoned to help some of the flailing economies, as was the
European Union. They arrived, promising loans to prop up weakened
economies, and in return, insisted on severe austerity measures. But
the medicine they prescribed—cut government spending, lay off
public-sector employees, rein in budget deficits—turned out to be
harsh.

The United Kingdom, under new
(conservative) management, also preached the virtues of austerity,
only to be rewarded with rising unemployment and tepid income growth.
Not even a superbly-conducted Olympics could reverse the tide.

In the meantime, the grim specter of
recession was beginning to haunt other members of the European Union.
Italy, Spain, Portugal—the fun-loving countries of southern
Europe—faced growing joblessness, shaky public finances, and
domestic discontent. Even France, Germany and the Netherlands—all
countries that had managed to keep their economies growing in an
increasingly unsettled neighborhood—were beginning to feel uneasy
about their prospects.

In Asia and Latin America, on the other
hand, things were a lot more rosy. Seemingly oblivious to the tremors
in the developed world, Brazil, China and India posted robust growth
year after year. Russia, too, enjoyed a spurt in prosperity as oil
prices remained high. There was very little talk of austerity.
Governments already played a significant role in these countries, and
the likelihood of a slowdown only spurred them to increase spending.

The disparity in the economic outcomes
led some to conclude that the developing countries

Sanjay Paul

had “decoupled”
from the developed countries. The suffering of the rich countries
would have no effect on the fortunes of the developing countries.

But a rather curious thing has happened
since then. In recent quarters, the United States has staged a
recovery, with unemployment falling from a peak of 10 percent during
the Great Recession to 7.7 percent in November. In 2008 and 2009,
amid the throes of the economic crisis, the government was advised to
leave the free market to its devices, practice austerity, and use
monetary policy to fight inflation. Anything else, they were warned,
would be an assault on capitalist principles, perhaps even
treasonous.

The Obama administration and Ben
Bernanke’s Federal Reserve ignored the advice (and threats). They
bailed out banks, insurance companies and the auto industry. They
implemented an $800 billion stimulus package consisting of a mix of
infrastructure spending, tax cuts for all, and funds to state and
local governments to keep teachers and police officers in their jobs.
And the Fed drove interest rates down to zero—and kept them there
in an effort to encourage households and firms to take out loans and
resume spending.

The results have been largely
encouraging. The American economy is expanding, jobs are being
created, and Inflation remains quiescent. Budget deficits as a ratio
of gross domestic product have come down sharply.

Meanwhile, the crisis in Europe remains
unresolved, threatening to drag even mighty Germany into a recession.
The economies of China, India and Brazil are still growing, but the
pace has slowed in recent months, raising doubts about the decoupling
hypothesis.

So once again, it is America that
offers the best hope for growth in the global economy. It has
demonstrated that austerity policies, whether self-imposed (UK) or
imposed from outside (Greece), are inimical to general prosperity.
But now, it must overcome the domestic political divisions that
threaten to push the U.S. economy over the fiscal cliff. It is not
just the living standards of Americans that are at stake, so too are
the fortunes of the rest of the world.

SANJAY PAUL is associate professor of economics at Elizabethtown College.